FastFacts: Stocks

The basics: When you buy shares of common stock, you become part owner of a corporation,along with other people and institutions, commonly numbering in the thousands. As a stockholder, you can make money in two ways: First, the company may pay dividends, which are your share of the company's profits. Second, if the price of the stock goes up, you can sell your shares for more than you paid. Conversely, if the stocks price declines, you risk losing money.

With thousands of companies to invest in, each with different levels of risk, stock selection takes some study. You should have the time and commitment to do ongoing investment research and analysis, and enough money to diversify your holdings.

The risks: Over the long haul, the stock market, as measured by the Standard & Poor's 500 Index, has significantly outperformed other types of investments, as well as inflation. While stocks deliver a bumpy ride along with their higher average returns, historically, good periods have offset bad ones and lowered the risk of loss. In fact, over the past 70 years, through periods of market crashes, wars, high inflation, and economic booms, large-company stocks have returned a pretax average annual gain of 10.7%. The key is to be prepared to weather short-term downward cycles and to focus on long-term performance, not day-to-day or year-to-year fluctuations.